Advanced Manufacturing Investment Credit, 17451-17466 [2023-05871]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 88, Number 56 (Thursday, March 23, 2023)]
[Proposed Rules]
[Pages 17451-17466]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-05871]



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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-120653-22]
RIN 1545-BQ54


Advanced Manufacturing Investment Credit

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations to implement the 
advanced manufacturing investment credit established by the CHIPS Act 
of 2022 to incentivize the manufacture of semiconductors and 
semiconductor manufacturing equipment within the United States. The 
regulations address the credit's eligibility requirements, an election 
that eligible taxpayers may make to be treated as making a payment of 
tax (including an overpayment of tax), or for an eligible partnership 
or S corporation to receive an elective payment, instead of claiming a 
credit, and a special 10-year credit recapture rule that applies if 
there is a significant transaction involving the material expansion of 
semiconductor manufacturing capacity in a foreign country of concern. 
This document also requests comments on the proposed regulations, 
including the definition of the term ``semiconductor.'' These proposed 
regulations affect taxpayers that claim the advanced manufacturing 
investment credit or instead make an elective payment election.

DATES: Written or electronic comments and requests for a public hearing 
must be received by May 22, 2023. Requests for a public hearing must be 
submitted as prescribed in the ``Comments and Requests for a Public 
Hearing'' section.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically. Submit electronic submissions via the Federal 
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-120653-
22) by following the online instructions for submitting comments. Once 
submitted to the Federal eRulemaking Portal, comments cannot be edited 
or withdrawn. The Department of the Treasury (Treasury Department) and 
the IRS will publish for public availability any comments submitted 
electronically and comments submitted on paper to its public docket. 
Send hard copy submissions to: CC:PA:LPD:PR (REG-120653-22), Room 5203, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Jason P. Deirmenjian of the Office of Associate Chief Counsel 
(Passthroughs and Special Industries), (202) 317-4137 (not a toll-free 
number); concerning submissions of comments and requests for a public 
hearing, call Vivian Hayes (202-317-5306) (not a toll-free number) or 
by email to [email protected] (preferred).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) under section 48D of the Internal Revenue 
Code (Code).
    Section 107(a) of the CHIPS Act of 2022 (CHIPS Act), enacted as 
Division A of Public Law 117-167, 136 Stat. 1366, 1393 (August 9, 
2022), added section 48D to the Code to establish the advanced 
manufacturing investment credit (section 48D credit) as an investment 
credit for purposes of section 46 of the Code, which is a current year 
general business credit under section 38 of the Code.
    The amount of the section 48D credit allowable to a taxpayer for 
any taxable year is generally an amount equal to 25 percent of the 
basis of any qualified property that is part of an eligible taxpayer's 
advanced manufacturing facility if the qualified property is placed in 
service during such taxable year and after December 31, 2022. See 
section 48D(a), and (b)(1) of the Code and section 107(f)(1) of the 
CHIPS Act. However, section 48D(e) provides that the section 48D credit 
does not apply to property the construction of which begins after 
December 31, 2026. In addition, in the case of any qualified property 
placed in service after December 31, 2022, but the construction of 
which began prior to January 1, 2023, the section 48D credit is 
available only to the extent of the basis of qualified property 
attributable to the construction, reconstruction, or erection after 
August 9, 2022 (the date of enactment of the CHIPS Act). See section 
107(f)(1) of the CHIPS Act. In addition, the portion of the basis of 
any such property that is attributable to qualified rehabilitation 
expenditures (as defined in section 47(c)(2) of the Code) in 
determining the rehabilitation credit under section 47 is excluded from 
a taxpayer's qualified investment with respect to any advanced 
manufacturing facility for any taxable year.
    For purposes of the section 48D credit, an ``eligible taxpayer'' is 
any taxpayer that (1) is not a foreign entity of concern (as defined in 
section 9901(6) of the William M. (Mac) Thornberry National Defense 
Authorization Act for Fiscal Year 2021, as amended by section 103 of 
the CHIPS Act), and (2) has not made an applicable transaction (as 
defined in section 50(a) of the Code) during the taxable year. See 
section 48D(c).
    Section 48D(b)(1) provides that the ``qualified investment'' with 
respect to any advanced manufacturing facility for any taxable year is 
the basis of any qualified property placed in service by the taxpayer 
during such taxable year which is part of an advanced manufacturing 
facility. Section 48D(b)(2) provides that for purposes of section 
48D(b), the term ``qualified property'' means tangible property with 
respect to which depreciation (or amortization in lieu of depreciation) 
is allowable that is integral to the operation of the advanced 
manufacturing facility if (I) constructed, reconstructed, or erected by 
the taxpayer, or (II) acquired by the taxpayer, if the original use of 
such property commences with the taxpayer. Qualified property includes 
any building or its structural components satisfying such requirements 
unless the building or portion of the building is used for offices, 
administrative services, or other functions unrelated to manufacturing. 
Section 48D(b)(3) provides that the term ``advanced manufacturing 
facility'' means a facility for which the primary purpose is the 
manufacturing of semiconductors or semiconductor manufacturing 
equipment.
    Section 48D(d)(1) allows a taxpayer to elect to treat the section 
48D credit determined for the taxpayer for a taxable year as a payment 
against the tax imposed by subtitle A of the Code (that is, treated as 
a payment of Federal income tax) equal to the amount of the credit 
rather than a credit against the taxpayer's Federal income tax 
liability for that taxable year (elective payment election). Section 
48D(d)(2) provides special rules relating to an elective payment 
election made for (A) property held directly by a partnership (within 
the meaning of section 761(a) of the Code) or an S corporation (as 
defined in section 1361(a)(1) of the Code) in which the partnership or 
S corporation actually receives a payment rather than a credit, (B) the 
period during which an elective payment election can be made, (C) the 
timing of the elective payment, (D) appropriations for making elective 
payments to partnerships and S

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corporations, (E) authority of the Secretary of the Treasury or her 
delegate (Secretary) to require additional information or registration 
of taxpayers, and (F) repayment of an excessive elective payment, plus 
a penalty of an amount equal to 20 percent of such excessive payment. 
Section 48D(d)(3) provides that the section 48D credit is zero for a 
taxpayer making an elective payment election.
    Section 48D(d)(4) provides that the elective payment election will 
not be treated as part of the income tax laws of any U.S. territory 
with a mirror code tax system (as defined in section 24(k) of the Code) 
unless the U.S. territory elects to have the elective payment election 
apply under its income tax laws. Under section 48D(d)(5), basis 
reduction and recapture rules similar to the rules of section 50(a) and 
(c) of the Code apply with respect to amounts treated as paid or 
actually received by a taxpayer under an elective payment election. 
Finally, section 48D(d)(6) authorizes the Secretary to issue 
regulations or other guidance determined to be necessary or appropriate 
to carry out the elective payment election provisions of section 
48D(d), including (A) regulations or other guidance providing rules for 
determining a partner's distributive share of deemed tax-exempt income, 
and (B) guidance to ensure that the amount treated as a payment made or 
the payment received by a taxpayer is commensurate with the amount of 
the section 48D credit that generally would be otherwise allowable 
(determined without regard to section 38(c)).
    Pursuant to section 107(c) of the CHIPS Act, payments made to a 
partnership or S corporation pursuant to the elective payment election, 
as well as amounts treated as payments against tax by taxpayers making 
an elective payment election, are exempt from reduction under any 
sequestration order issued under the Balanced Budget and Emergency 
Deficit Control Act of 1985 (2 U.S.C. 900 et seq.) on or after December 
31, 2022.
    Section 107(b) of the CHIPS Act added new sections 50(a)(3) and 
(6)(D) and (E) to the Code to provide special recapture rules for 
certain expansions in connection with advanced manufacturing 
facilities. Under section 50(a)(3)(A), if there is an applicable 
transaction by an applicable taxpayer before the close of the 10-year 
period beginning on the date such taxpayer placed in service property 
that is eligible for the section 48D credit, then the taxpayer's 
Federal income tax liability under chapter 1 of the Code (chapter 1) 
for the taxable year in which such transaction occurs must be increased 
by 100 percent of the aggregate decrease in the credits allowed under 
section 38 for all prior taxable years which would have resulted solely 
from reducing to zero any investment credit determined under section 46 
that is attributable to the section 48D credit with respect to such 
property (applicable transaction recapture rule). Section 50(a)(3)(B) 
provides an exception to the applicable transaction recapture rule for 
an applicable taxpayer that demonstrates to the satisfaction of the 
Secretary that the applicable transaction has been ceased or abandoned 
within 45 days of a determination and notice by the Secretary. Section 
50(a)(3)(C) authorizes the Secretary to issue such regulations or other 
guidance as the Secretary determines necessary or appropriate to carry 
out the purposes of the applicable transaction recapture rule, 
including regulations or other guidance providing for recordkeeping 
requirements or information reporting for purposes of administering the 
requirements of section 50(a)(3).
    As added to the Code by section 107(b)(2) of the CHIPS Act, section 
50(a)(6)(D) provides that for purposes of section 50(a), the term 
``applicable transaction'' means, with respect to any applicable 
taxpayer, any significant transaction (as determined by the Secretary, 
in coordination with the Secretary of Commerce and the Secretary of 
Defense) involving the material expansion of semiconductor 
manufacturing capacity of such applicable taxpayer in a foreign country 
of concern (as defined in section 9901(7) of the William M. (Mac) 
Thornberry National Defense Authorization Act for Fiscal Year 2021, as 
amended by section 103 of the CHIPS Act) other than certain 
transactions that primarily involve the expansion of manufacturing 
capacity for legacy semiconductors (as defined in section 9902(a)(6) of 
the William M. (Mac) Thornberry National Defense Authorization Act for 
Fiscal Year 2021, as amended by section 103 of the CHIPS Act). As 
discussed in the Explanation of Provisions section of this preamble, 
the proposed regulations primarily apply long-established credit 
mechanics and procedures common to all investment tax credits 
(including the section 48D credit) previously set forth in regulations 
and subregulatory guidance and, consistent with statute, incorporate 
definitional concepts as determined by the Secretary of Commerce, which 
are provided in proposed 15 CFR part 231, as contained in the proposed 
rule, Preventing the Improper Use of CHIPS Act Funding, issued by the 
CHIPS Program Office, National Institute of Standards and Technology, 
Department of Commerce (Commerce Proposed Rule). The Commerce Proposed 
Rule provides guardrails to prevent the improper use of CHIPS Act 
funding overseen by the Department of Commerce.
    Section 50(a)(6)(E) defines an ``applicable taxpayer'' for purposes 
of section 50(a) as any taxpayer who has been allowed a section 48D 
credit for any prior taxable year.

Explanation of Provisions

I. Advanced Manufacturing Investment Credit Determined

    The proposed regulations provide rules for calculating the amount 
of a taxpayer's qualified investment pursuant to section 48D(b)(1), 
generally, and in the context of certain passthrough entities. Section 
48D(b)(1) specifies that qualified investment ``is the basis of any 
qualified property placed in service by the taxpayer during such 
taxable year which is part of an advanced manufacturing facility.'' The 
statute is silent as to manner in which a taxpayer's basis in qualified 
property is allocated in the context of passthrough entities. The 
proposed regulations clarify that a partner's share of basis in the 
qualified property of a partnership is determined under the rules in 
Sec.  1.46-3(f). Section 1.46-3(f) contains rules for determining a 
partner's share of the qualified basis of a partnership under the 
former investment tax credit provisions (former sections 46(a) (amount 
of investment credit) and (c) (qualified basis)). Under those 
regulations and consistent with section 48D(b)(1), a partner is treated 
as the taxpayer with respect to its share of the basis of the 
partnership's qualified property for calculating its qualified 
investment. A partner's share of the partnership's basis generally is 
determined in accordance with the ratio in which the partners divide 
the general profits of the partnership (that is, taxable income of the 
partnership as described in section 702(a)(8)).
    The proposed regulations specify that an S corporation must 
apportion the basis of qualified property pro rata among its 
shareholders. A shareholder is treated as the taxpayer with respect to 
the shareholder's share of basis in the qualified property of the S 
corporation. The proposed regulations further specify that an estate or 
trust must apportion the basis of the estate or trust's qualified 
property among the estate or trust and its beneficiaries on the basis 
of the income of the estate or trust allocable to each for that taxable

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year. A beneficiary to which the basis of qualified property is 
apportioned is, for purposes of the section 48D credit, treated as the 
taxpayer with respect to the property. The proposed regulations are 
consistent with the rules for allocating basis with respect to an 
electing small business corporation and estates and trusts under Sec.  
1.48-5 and Sec.  1.48-6, respectively, which contain rules for 
allocating basis for purposes of former sections 48(e) and (f), 
respectively. Comments are requested as to whether it would be helpful 
for the final regulations or other guidance to further address the 
manner in which a taxpayer's basis in qualified property is allocated 
in the context of passthrough entities.
    Under section 48D(b)(5), ``rules similar to the rules of 
subsections (c)(4) and (d) of section 46 (as in effect on the day 
before the date of the enactment of the Revenue Reconciliation Act of 
1990) shall apply for purposes of section 48D(a).'' The proposed 
regulations address a taxpayer's ability to make a qualified progress 
expenditure election, as provided in Sec.  1.46-5, to increase its 
qualified investment by any qualified progress expenditures, made after 
December 31, 2022. Comments are requested as to whether it would be 
helpful for the final regulations or other guidance to expand or 
clarify a taxpayer's ability to claim a section 48D credit for 
qualified progress expenditures.
    Section 48D(b)(4) excludes from qualified investment ``that portion 
of the basis of any property which is attributable to qualified 
rehabilitation expenditures (as defined in section 47(c)(2)).'' The 
proposed regulations clarify that a taxpayer's qualified investment 
does not include the amount of any capital expenditures that meet the 
definition of a qualified rehabilitation expenditure.

II. Qualified Property

    Section 48D(b)(2)(B)(ii) excepts from the definition of qualified 
property ``a building, or a portion of a building, used for offices, 
administrative services, or other functions unrelated to 
manufacturing.'' The proposed regulations clarify that human resources 
or personnel services, payroll services, legal and accounting services, 
and procurement services; sales and distribution functions; and 
security services (not including cybersecurity operations) are among 
functions unrelated to manufacturing semiconductors or semiconductor 
manufacturing equipment.
    Under section 48D(b)(2)(A)(iii)(II), the term ``qualified 
property'' means property acquired by the taxpayer if the original use 
of such property commences with the taxpayer. The proposed regulations 
define the term ``original use'' generally as the first use to which 
the property is put by any taxpayer in connection with a trade or 
business or for the production of income. In addition, the proposed 
regulations add rules related to the definition of ``original use'' for 
inventory.
    Under section 48D(b)(2)(A)(iv) property must be ``integral to the 
operation of the advanced manufacturing facility'' to meet the 
definition of qualified property. The proposed regulations specify that 
property is integral to the manufacturing of semiconductors or 
semiconductor manufacturing equipment if it is used directly in the 
manufacturing operation and is essential to the completeness of the 
manufacturing operation. The proposed regulations further specify that 
property, including a building and its structural components, that 
constitutes a research or storage facility may qualify as integral to 
the operation of an advanced manufacturing facility if the property is 
used in connection with the manufacturing of semiconductors or 
semiconductor manufacturing equipment. Conversely, a research facility 
that does not manufacture any type of semiconductors or semiconductor 
manufacturing equipment does not qualify.

III. Advanced Manufacturing Facility

    Section 48D(b)(3) provides that an advanced manufacturing facility 
must be a ``facility for which the primary purpose is the manufacturing 
of semiconductors or semiconductor manufacturing equipment.'' The 
proposed regulations explain that the determination of whether the 
primary purpose of a facility is manufacturing finished semiconductors 
or manufacturing finished semiconductor manufacturing equipment will be 
made based on all the facts and circumstances and list certain facts 
and circumstances relevant to this test. The proposed regulations make 
clear that a facility that manufactures, produces, grows, or extracts 
materials or chemicals that are supplied to an advanced manufacturing 
facility that manufactures semiconductors, or semiconductor 
manufacturing equipment, does not meet the primary purpose requirement.
    The proposed regulations also define the terms ``semiconductor 
manufacturing'' or ``manufacturing of semiconductors'' and 
``manufacturing of semiconductor manufacturing equipment'' for purposes 
of section 48D.
    The Treasury Department and the IRS specifically request comments 
on the scope of the definition in proposed Sec.  1.48-2(k) of the term 
``semiconductor.'' Specifically, comments are requested as to whether 
this term, for purposes of the section 48D credit, should include 
semiconductive substances--materials with electronic properties 
controllable by the addition of, typically small, quantities of 
specific elements or dopants--on which an electronic device or system 
is manufactured, such as, but not limited to polysilicon and compound 
semiconductor wafers. If so, commenters are requested to explain in 
detail what principle, standard, or parameters could be incorporated in 
a definition of the term ``semiconductor'' so as to prevent extending 
the definition of that term to also include other materials and 
supplies used in the manufacture of finished semiconductors.

IV. Beginning of Construction

    The proposed regulations provide guidance regarding the beginning 
of construction requirement for purposes of the effective date 
provision in section 107(f)(1) of the CHIPS Act, and the credit 
termination rule in section 48D(e). The proposed regulations specify 
that a taxpayer can establish that construction of a property has begun 
by meeting the Physical Work Test or the Five Percent Safe Harbor, as 
that test and safe harbor are described in the proposed regulation. The 
proposed regulations define what is considered the unit of property for 
purposes of determining the beginning of construction under section 
48D(e). Solely for purposes of determining whether construction of a 
property has begun for purposes of section 48D and the section 48D 
regulations, multiple items of qualified property or advanced 
manufacturing facilities that are operated as part of a single advanced 
manufacturing facility project are treated as a single item of 
property. Whether multiple qualified properties or advanced 
manufacturing facilities are operated as part of a single advanced 
manufacturing facility project will depend on all the relevant facts 
and circumstances. Thus, whether the beginning of construction 
requirement is satisfied with respect to any item of property generally 
is determined based on the date construction of the item of property 
began, or the date construction of the single advanced manufacturing 
facility project that the item is part of began.
    In addition, the proposed regulations further explain that under 
either the

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Physical Work Test or the Five Percent Safe Harbor, a taxpayer must 
meet the Continuity Requirement, as described in the proposed 
regulation, to establish the beginning of construction. For this 
requirement, a taxpayer must demonstrate that either continuous 
construction or continuous efforts have occurred. Whether a taxpayer 
meets the Continuity Requirement under either test is determined by all 
the relevant facts and circumstances. The IRS will closely scrutinize a 
unit of property and may determine that the beginning of construction 
is not satisfied with respect to property if a taxpayer does not meet 
the Continuity Requirement.
    Finally, section 1 of Executive Order 14080 of August 25, 2022 
(E.O. 14080), Implementation of the CHIPS Act of 2022 (87 FR 52847), 
states that the policy underlying the CHIPS Act (which established the 
section 48D credit) is, in part, to ``make transformative investments 
to restore and advance our Nation's leadership in the research, 
development, and manufacturing of semiconductors'' and to ``bolster 
United States technology leadership; and reduce our dependence on 
critical technologies from China and other vulnerable or overly 
concentrated foreign supply chains.'' In this regard, section 2 of E.O. 
14080 directs, in part, that in implementing the CHIPS Act, as 
appropriate, and to the extent consistent with the law, the Treasury 
Department and the IRS prioritize, economic, sustainability, and 
national security needs, by building domestic manufacturing capacity 
that reduces reliance on vulnerable or overly concentrated foreign 
production for both leading-edge and mature microelectronics, and 
ensuring long-term United States leadership in the microelectronics 
sector. Given the critical national security and foreign policies of 
the United States that the section 48D credit, as part of the CHIPS 
Act, is intended to achieve, the Department of the Treasury and the IRS 
have determined that it is appropriate for the proposed regulations to 
provide an extended safe harbor for satisfying the Continuity 
Requirement in this unique case. Under the safe harbor provided in 
proposed Sec.  1.48D-5(e)(6), a taxpayer is deemed to satisfy the 
Continuity Requirement provided the property is placed in service no 
more than 10 calendar years after the date that the Physical Work Test 
or the Five Percent Safe Harbor is first satisfied with respect to that 
item of property or the single advanced manufacturing facility project 
that the item of property is part of.

V. Elective Payment Election

    Section 48D(d)(2)(A)(i) provides that, in the case of a partnership 
or an S corporation that makes an election under section 48D(d)(1) (in 
such manner as the Secretary may provide) with respect to the section 
48D credit, ``the Secretary shall make a payment to such partnership or 
S corporation equal to the amount of such credit.'' Comments are 
requested on any guidance needed to determine the extent to which, if 
any, other Code provisions that limit the amount of a credit to a 
taxpayer, such as section 469 (passive activity credits), section 49 
(at-risk credit rules), and section 50, may be applied to limit the 
amount of the Secretary's payment to the partnership or S corporation 
pursuant to section 48D(d)(2)(A)(i)(I). Comments are also generally 
requested on the treatment of the Secretary's payment to the 
partnership or S corporation under the provisions of subchapters K and 
S of chapter 1, respectively.
    Section 48D(d)(2)(E) provides that ``as a condition of, and prior 
to, any amount being treated as a payment which is made by the taxpayer 
under [section 48D(d)(1)] or any payment being made pursuant to 
[section 48D(d)(2)(A)(i)(I)], the Secretary may require such 
information or registration as the Secretary deems necessary or 
appropriate for purposes of preventing duplication, fraud, improper 
payments or excessive payments under [section 48D].'' The IRS intends 
to provide, through forms and instructions, the procedures for 
registration of properties for which an election under section 48D(d) 
will be made. Comments are requested on the registration requirements 
and other procedures for purposes of section 48D(d)(2)(E).
    Section 48D(d)(2)(F)(i) provides that in the case of an elective 
payment election, that the Secretary determines constitutes an 
excessive payment, the tax imposed on such taxpayer by chapter 1 for 
the taxable year in which such determination is made will be increased 
by an amount equal to the sum of (I) the amount of such excessive 
payment, plus (II) an amount equal to 20 percent of such excessive 
payment. Section 48D(d)(2)(F)(iii) defines an excessive payment as ``an 
amount equal to the excess of--(I) the amount treated as a payment 
under [section 48D(d)(1)], or the amount of the payment made pursuant 
to [section 48D(d)(2)(A)], . . . over (II) the amount of the credit 
which, without application of this subsection, would be otherwise 
allowable (determined without regard to section 38(c)) under [section 
48D(a)] with respect to such property for such taxable year.'' Comments 
are requested on any guidance needed with respect to the amount that 
``would be otherwise allowable'' for purposes of section 
48D(d)(2)(F)(iii)(II).
    Section 48D(d)(5) provides that ``rules similar to the rules of 
[sections 50(a) and (c)] shall apply with respect to--(A) any amount 
treated as a payment which is made by the taxpayer under [section 
48D(d)(1)], and (B) any payment made pursuant to [section 
48D(d)(2)(A)].'' Comments are requested on the guidance necessary to 
clarify the rules that are similar to the rules of sections 50(a) 
(investment credit recapture in the case of dispositions, etc.) and (c) 
(basis adjustment to investment credit property) for purposes of 
section 48D(d)(5).

VI. Recapture in the Case of Certain Expansions

    The statutory applicable transaction recapture rule in section 
50(a)(3) is intended to dissuade an ``applicable taxpayer'' from 
engaging in an ``applicable transaction'' after property qualifying for 
a section 48D credit is placed in service.
    Section 50(a)(6)(D) defines an applicable transaction to mean, with 
respect to any applicable taxpayer, any significant transaction (as 
determined by the Secretary, in coordination with the Secretary of 
Commerce and the Secretary of Defense) involving the material expansion 
of semiconductor manufacturing capacity of such applicable taxpayer in 
a foreign country of concern. The term ``foreign country of concern'' 
is defined in section 9901(a)(7) of the William M. (Mac) Thornberry 
National Defense Authorization Act for Fiscal Year 2021, as amended by 
section 103 of the CHIPS Act, to mean a country that is a covered 
nation (as defined in section 4872(d) of title 10) and any country that 
the Secretary of Commerce, in consultation with the Secretary of 
Defense, the Secretary of State, and the Director of National 
Intelligence, determines to be engaged in conduct that is detrimental 
to the national security or foreign policy of the United States. The 
proposed regulations define a foreign country of concern consistent 
with the statute. Additionally, in coordination with the Secretary of 
Commerce and the Secretary of Defense and pursuant to the Secretary's 
authority under section 50(a)(6)(D)(i) to determine whether 
transactions are significant transactions, the proposed regulations 
define the term ``significant transaction'' to align and harmonize the 
scope of applicable transactions under section 50(a)(3) with

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the scope of prohibited expansion transactions within the meaning of 
proposed Sec.  231.202 (relating to the Prohibition on Certain 
Expansion Transactions) as contained in the Commerce Proposed Rule. 
Accordingly, proposed Sec.  1.50-2(b)(10) defines the term 
``significant transaction'' consistent with proposed Sec.  231.202 as 
contained in the Commerce Proposed Rule to include certain transactions 
engaged in by an applicable taxpayer or an applicable taxpayer's 
affiliates (within the meaning of proposed Sec.  231.101 as contained 
in the Commerce Proposed Rule).
    Section 50(a)(6)(E) defines an applicable taxpayer to mean ``any 
taxpayer who has been allowed a credit under section 48D(a) for any 
prior taxable year.'' The proposed regulations provide that an 
applicable taxpayer also includes (i) any member of an affiliated group 
under section 1504(a) of the Code, determined without regard to section 
1504(b)(3) of the Code, that includes a taxpayer who has been allowed a 
credit under section 48D(a) for any prior taxable year, (ii) any 
taxpayer who has made an election under section 48D(d)(1), (iii) any 
partnership or S corporation that has made an election under section 
48D(d)(2), and (iv) any partner in a partnership (directly or 
indirectly through one or more tiered partnerships) or shareholder in 
an S corporation for which the entity has made an election under 
section 48D(d)(2) with respect to a credit determined under section 
48D(a)(1) for any taxable year prior to the taxable year in which such 
entity entered into an applicable transaction.
    If an applicable taxpayer engages in an applicable transaction 
before the close of the 10-year period beginning on the date such 
taxpayer placed in service any property eligible for the section 48D 
credit, then the applicable taxpayer is subject to an increase in tax 
under chapter 1 for the taxable year in which the applicable 
transaction occurs, as provided in section 50(a)(3). The proposed 
regulations generally address the amount of recapture required pursuant 
to section 50(a)(3). For example, if a taxpayer claims a section 48D 
credit on property it owns directly and also claims a section 48D 
credit on property placed in service by a partnership in which it is a 
partner, and that taxpayer subsequently enters into an applicable 
transaction within 10 years of claiming those section 48D credits, then 
the proposed regulations require that the taxpayer recapture all the 
credits claimed (that is, credits for property owned directly and 
through its investment in the partnership). The proposed regulations 
provide for the same result if, instead of the taxpayer entering into 
the applicable transaction, the partnership enters into the applicable 
transaction. Comments are requested on the appropriate amount of 
recapture required in the context of partnerships and S corporations, 
including the appropriateness of the recapture results in the above 
examples.
    As noted in the Background section of this preamble, section 
50(a)(3)(C) authorizes the Secretary to issue such regulations or other 
guidance as the Secretary determines necessary or appropriate to carry 
out the purposes of the applicable transaction recapture rule, 
including regulations or other guidance providing for recordkeeping 
requirements or information reporting for purposes of administering the 
requirements of section 50(a)(3). The Treasury Department and the IRS 
are considering proposing record retention and information reporting 
requirements for applicable taxpayers in addition to those required 
under current law such that the IRS would have sufficient knowledge 
regarding proposed applicable transactions and applicable transactions 
the taxpayer has engaged in. For example, record retention or 
information reporting requirements may require an applicable taxpayer 
to maintain records or file information with the IRS related to any 
proposed or planned significant transaction for a period not ending 
earlier than the applicable period of limitations under section 6501 of 
the Code on assessment and collection of tax under chapter 1 with 
respect to the applicable taxpayer's return filed for the taxable year 
that includes the close of the 10-year period beginning on the date 
such taxpayer placed in service investment credit property that is 
eligible for the section 48D credit.
    Additionally, the Treasury Department and the IRS are considering 
information reporting requirements that would require notifying the IRS 
regarding any planned significant transactions of the applicable 
taxpayer involving the material expansion of semiconductor 
manufacturing capacity in a foreign country of concern, including any 
transaction the applicable taxpayer considers to be eligible for an 
exception under section 50(a)(3) or proposed Sec.  1.50-2. For example, 
such requirements may require the applicable taxpayer to report 
accurate and complete information relating to the applicable 
transaction, including: (i) the name, employer identification number, 
and other identifying information regarding the applicable taxpayer 
that is proposing or engaging in a planned applicable transaction, and 
all other parties to the applicable transaction; (ii) the name and 
location of any business in a foreign country of concern where 
semiconductor manufacturing capacity may be materially expanded by the 
applicable transaction; (iii) a brief description of the planned 
applicable transaction, including the specific semiconductor products 
currently manufactured, the current production technology node and 
semiconductor manufacturing capacity, as well as the specific 
semiconductor products proposed for manufacture, the proposed 
production technology node, and proposed semiconductor manufacturing 
capacity; (iv) if the planned applicable transaction involves the 
material expansion of semiconductor manufacturing capacity that 
produces legacy semiconductors for which the products will 
predominately serve the market of a foreign country of concern, 
documentation as to where the final products incorporating the legacy 
semiconductors are to be used or consumed including the percentage of 
semiconductor manufacturing capacity or percentage of sales revenue 
that will be accounted for by use or consumption of the final goods in 
the foreign country of concern, and (v) if applicable, a statement 
explaining how the planned significant transaction meets the 
requirements of an exception to the applicable transaction recapture 
rule that involve the material expansion of semiconductor manufacturing 
capacity in proposed Sec.  1.50-2. The Treasury Department and the IRS 
request comments on the ability of applicable taxpayers to comply with 
such requirements and what specific procedures should be considered to 
ensure that the IRS has sufficient information to determine whether an 
applicable taxpayer engages in an applicable transaction within the 
meaning of section 50(a)(3) and proposed Sec.  1.50-2.

IV. Applicability Date

    These regulations (Sec. Sec.  1.48D-1 through 1.48D-6, and Sec.  
1.50-2) are proposed to apply to taxable years ending on or after the 
date the Treasury decision adopting these regulations as final 
regulations are published in the Federal Register. Taxpayers may rely 
on these proposed regulations for property placed in service after 
December 31, 2022, in taxable years ending before the date the Treasury 
decision adopting these regulations as final regulations is published 
in the Federal Register, provided the taxpayers follow proposed 
Sec. Sec.  1.48D-1 through 1.48D-6, and Sec.  1.50-2 in their entirety 
and in a consistent manner.

[[Page 17456]]

Special Analyses

I. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) 
generally requires that a Federal agency obtain the approval of the 
Office of Management and Budget (OMB) before collecting information 
from the public, whether such collection of information is mandatory, 
voluntary, or required to obtain or retain a benefit.
    For purposes of the PRA, the reporting burden associated with the 
collection of information in proposed Sec.  1.48D-6(a)(1) and (2) will 
be reflected in the Paperwork Reduction Act Submissions associated with 
Form 3468 (OMB control number 1545-0155). The reporting burden 
associated with the collection of information in proposed Sec.  1.48D-
6(c) will be reflected in the Paperwork Reduction Act Submissions 
associated with Form 15396 (OMB control number pending). The reporting 
burden associated with the collection of information proposed in Sec.  
1.50-2(a) will be reflected in the Paperwork Reduction Act Submissions 
associated with Form 4255 (OMB control number 1545-0166). The IRS 
anticipates providing an opportunity to comment on any revisions to the 
forms through subsequent notice in the Federal Register and on 
www.irs.gov/draftforms.

II. Regulatory Flexibility Act

    In accordance with the Regulatory Flexibility Act (5 U.S.C. chapter 
6), it is hereby certified that these proposed regulations will not 
have a significant economic impact on a substantial number of small 
entities. Although the rules may affect small entities, data are not 
readily available about the number of taxpayers affected. The economic 
impact of these regulations is not likely to be significant, because 
these proposed regulations substantially incorporate statutory changes 
by the CHIPS Act in establishing section 48D and amending section 50(a) 
and assist taxpayers in understanding section 48D and the changes to 
section 50(a). The proposed regulations will also make it easier for 
taxpayers to comply with section 48D and the changes to section 50(a). 
Notwithstanding this certification, the Treasury Department and the IRS 
welcome comments on the impact of these regulations on small entities.

III. Section 7805(f)

    Pursuant to section 7805(f), this notice of proposed rulemaking has 
been submitted to the Chief Counsel for the Office of Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

IV. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any one year by a 
State, local, or Tribal government, in the aggregate, or by the private 
sector, of $100 million (updated annually for inflation). This proposed 
rule does not include any Federal mandate that may result in 
expenditures by State, local, or Tribal governments, or by the private 
sector in excess of that threshold.

IV. Executive Order 13132: Federalism

    Executive Order 13132 (Federalism) prohibits an agency from 
publishing any rule that has federalism implications if the rule either 
imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. This proposed rule does not have 
federalism implications and does not impose substantial direct 
compliance costs on State and local governments or preempt State law 
within the meaning of the Executive order.

V. Regulatory Planning and Review

    The Administrator of the Office of Information and Regulatory 
Affairs (OIRA), Office of Management and Budget, has determined that 
this proposed rule is not a significant regulatory action, as that term 
is defined in section 3(f) of Executive Order 12866. Therefore, OIRA 
has not reviewed this proposed rule pursuant to section 6(a)(3)(A) of 
Executive Order 12866 and the April 11, 2018, Memorandum of Agreement 
between the Treasury Department and the Office of Management and Budget 
(OMB).

Comments and Requests for a Public Hearing

    Before the proposed regulations are adopted as final regulations, 
consideration will be given to comments that are submitted timely to 
the IRS as prescribed in the preamble under the ADDRESSES section. The 
Treasury Department and the IRS request comments on all aspects of the 
proposed regulations. Any comments submitted will be made available at 
www.regulations.gov or upon request. A public hearing will be scheduled 
if requested in writing by any person who timely submits electronic or 
written comments. Requests for a public hearing are encouraged to be 
made electronically. If a public hearing is scheduled, notice of the 
date and time for the public hearing will be published in the Federal 
Register. Announcement 2020-4, 2020-17 IRB 1, provides that until 
further notice, public hearings conducted by the IRS will be held 
telephonically. Any telephonic hearing will be made accessible to 
people requesting a reasonable accommodation.

Statement of Availability of IRS Documents

    Guidance cited in this preamble is published in the Internal 
Revenue Bulletin and is available from the Superintendent of Documents, 
U.S. Government Publishing Office, Washington, DC 20402, or by visiting 
the IRS website at https://www.irs.gov.

Drafting Information

    The principal author of these proposed regulations is Jason P. 
Deirmenjian Office of the Associate Chief Counsel (Passthroughs and 
Special Industries), IRS. However, other personnel from the Treasury 
Department and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS propose to amend 
26 CFR part 1 as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding 
sectional authorities for Sec. Sec.  1.48D-6 and 1.50-2 to read in part 
as follows:

    Authority:  26 U.S.C. 7805 * * *
    Section 1.48D-6 also issued under 26 U.S.C. 48D(d)(6).
    Section 1.50-2 also issued under 26 U.S.C. 50(a)(3)(C).
* * * * *

0
Par. 2. Sections 1.48D-0 through 1.48D-6 are added to read as follows:

Sec.
* * * * *
1.48D-0. Table of contents.
1.48D-1 Advanced manufacturing investment credit determined.
1.48D-2 Definitions.
1.48D-3 Qualified property.
1.48D-4 Advanced manufacturing facility of an eligible taxpayer.
1.48D-5 Beginning of construction.
1.48D-6 Elective payment election.
* * * * *

[[Page 17457]]

Sec.  1.48D-0.  Table of contents.

    This section lists the table of contents for Sec. Sec.  1.48D-1 
through 1.48D-6.

Sec.  1.48D-1 Advanced manufacturing investment credit determined

    (a) Overview.
    (b) Determination of credit.
    (c) Coordination with section 47.
    (1) In general.
    (2) Example.
    (d) Applicability date.

Sec.  1.48D-2 Definitions

    (a) In general.
    (b) Applicable transaction.
    (c) Basis.
    (d) Beginning of construction.
    (e) Eligible taxpayer.
    (f) Foreign entities.
    (1) Foreign entity.
    (2) Foreign entity of concern.
    (3) Owned by, controlled by, or subject to the jurisdiction or 
direction of.
    (g) Placed in service.
    (h) Qualified investment.
    (1) In general.
    (2) Special rules for certain passthrough entities.
    (i) Partnerships.
    (ii) S corporations.
    (iii) Estate or trust.
    (3) Qualified progress expenditures election.
    (4) Examples.
    (i) Example 1.
    (ii) Example 2.
    (i) Section 48D credit.
    (j) Section 48D regulations.
    (k) Semiconductor.
    (l) Semiconductor manufacturing.
    (1) In general.
    (2) Semiconductor manufacturing processes.
    (i) Packaging.
    (ii) Advanced Packaging.
    (m) Semiconductor manufacturing equipment.
    (n) Manufacturing semiconductor manufacturing equipment.
    (o) Applicability date.

Sec.  1.48D-3 Qualified property

    (a) In general.
    (b) Qualified property.
    (c) Tangible depreciable property.
    (1) In general.
    (2) Exception.
    (d) Constructed, reconstructed, or erected by the taxpayer.
    (e) Original use.
    (1) In general.
    (2) Treatment of inventory.
    (f) Integral to the operation of an advanced manufacturing 
facility.
    (1) In general.
    (2) Research or storage facilities.
    (g) Applicability date.

Sec.  1.48D-4 Advanced manufacturing facility of an eligible 
taxpayer

    (a) In general.
    (b) Advanced manufacturing facility.
    (c) Primary purpose.
    (1) In general.
    (2) No primary purpose.
    (3) Examples.
    (i) Example (i).
    (ii) Example (ii).
    (d) Applicability date.

Sec.  1.48D-5 Beginning of construction

    (a) Termination of credit.
    (1) In general.
    (2) Property.
    (3) Single advanced manufacturing facility project.
    (i) Factors used for single advanced manufacturing facility 
project determination.
    (ii) Example.
    (iii) Timing of single advanced manufacturing facility project 
determination.
    (iv) Disaggregation.
    (v) Example.
    (b) Beginning of construction.
    (1) In general.
    (2) Continuity requirement.
    (c) Physical work test.
    (1) In general.
    (2) Physical work of significant nature.
    (i) In general.
    (ii) Exceptions.
    (d) Five percent safe harbor.
    (1) In general.
    (2) Costs.
    (3) Cost overruns.
    (i) Single advanced manufacturing facility project.
    (ii) Example.
    (iii) Single property.
    (A) Example.
    (B) [Reserved].
    (e) Continuity requirement.
    (1) In general.
    (2) Continuous construction.
    (3) Continuous efforts.
    (4) Excusable disruptions to continuous construction and 
continuous efforts tests.
    (i) In general.
    (ii) Effect of excusable disruptions on continuity safe harbor.
    (iii) Non-exclusive list of construction disruptions.
    (5) Timing of excusable disruption determination.
    (6) Continuity safe harbor.
    (i) In general.
    (ii) Example.
    (f) Applicability date.

Sec.  1.48D-6 Elective payment election

    (a) Elective payment election.
    (1) In general.
    (2) Timing of election.
    (3) Irrevocable.
    (4) Denial of double benefit.
    (5) Treatment of payment.
    (b) Special rules for partnerships and S corporations.
    (1) In general.
    (2) [Reserved].
    (c) Registration requirement.
    (1) In general.
    (2) [Reserved].
    (d) Excessive payment.
    (1) In general.
    (2) Reasonable cause.
    (3) Excessive payment defined.
    (4) [Reserved].
    (e) Basis reduction and recapture.
    (1) In general.
    (2) [Reserved].
    (f) Mirror code territories.
    (g) Applicability date.


Sec.  1.48D-1  Advanced manufacturing investment credit determined.

    (a) Overview. For purposes of section 46 of the Internal Revenue 
Code (Code), the amount of the advanced manufacturing investment credit 
under section 48D of the Code determined for any taxable year is the 
amount determined under section 48D and the section 48D regulations 
(subject to any applicable provisions of the Code that may limit the 
amount determined under section 48D), for such taxable year with 
respect to any advanced manufacturing facility of an eligible taxpayer. 
Paragraph (b) of this section provides the general rules for 
determining the amount of a taxpayer's section 48D credit for a taxable 
year. Paragraph (c) of this section provides rules coordinating the 
section 48D credit with the rules of section 47 (relating to the 
rehabilitation credit). Section 1.48D-2 provides definitions that apply 
for purposes of section 48D and the section 48D regulations. Section 
1.48D-3 provides rules relating to the definition of qualified property 
for purposes of the section 48D credit. Section 1.48D-4 provides rules 
relating to the definition of an advanced manufacturing facility of an 
eligible taxpayer for purposes of the section 48D credit. Section 
1.48D-5 provides rules regarding the beginning of construction of 
property for purposes of the section 48D credit. Section 1.48D-6 
provides rules relating to the elective payment election available to a 
taxpayer under section 48D(d) to be treated as making a payment of tax, 
or for a partnership or S corporation to receive an actual payment, in 
lieu of claiming a section 48D credit. See Sec.  1.50-2 for additional 
rules under section 50(a)(3) and (6) of the Code relating to applicable 
transactions that result in the recapture of section 48D credits.
    (b) Determination of credit. Subject to any applicable sections of 
the Code that may limit the credit determined under section 48D, the 
section 48D credit for any taxable year of an eligible taxpayer with 
respect to any advanced manufacturing facility is an amount equal to 25 
percent of the taxpayer's qualified investment for the taxable year 
with respect to that advanced manufacturing facility. A section 48D 
credit is available only with respect to qualified property that a 
taxpayer places in service after December 31, 2022, and, for any 
qualified property the construction of which began prior to January 1, 
2023, but only to the extent of the basis of that property attributable 
to the construction, reconstruction, or erection of that property 
occurring after August 9, 2022. Under section 48D(e),

[[Page 17458]]

no section 48D credit is allowed to a taxpayer for placing qualified 
property in service in any taxable year if the beginning of 
construction of that qualified property as determined under Sec.  
1.48D-5 begins after December 31, 2026 (the date specified in section 
48D(e)).
    (c) Coordination with section 47--(1) In general. The qualified 
investment with respect to any advanced manufacturing facility of an 
eligible taxpayer for any taxable year does not include that portion of 
the basis of any property that is attributable to qualified 
rehabilitation expenditures, as defined in section 47(c)(2) and Sec.  
1.48-12(c), with respect to a qualified rehabilitated building, as 
defined in section 47(c)(1) and Sec.  1.48-12(b).
    (2) Example: Coordination with section 47. X Corp, a calendar-year 
C corporation, owns Building A, a certified historic structure. X 
Corp's adjusted basis in Building A is $100,000. Between August 1, 
2024, and October 31, 2024, X Corp incurs $1 million to reconstruct, 
within the meaning of section 48D(b)(2)(A)(iii)(I) and Sec.  1.48-
12(b)(2)(iv), Building A. X Corp places the reconstructed Building A, a 
qualified rehabilitated building, in service on November 15, 2024. Of 
the $1 million of capitalized expenditures incurred to reconstruct 
Building A (all of which would meet the definition of qualified 
investment), $250,000 also meets the definition of qualified 
rehabilitation expenditures. As such, X's qualified investment in 
Building A is $750,000 ($1 million-$250,000).
    (d) Applicability date. This section applies to property that is 
placed in service after December 31, 2022, and during a taxable year 
ending on or after [DATE OF PUBLICATION OF FINAL RULE].


Sec.  1.48D-2  Definitions.

    (a) In general. The definitions in paragraphs (b) through (n) of 
this section apply for purposes of sections 48D and 50 of the Internal 
Revenue Code (Code) and the section 48D regulations.
    (b) Applicable transaction. The term applicable transaction has the 
meaning provided in section 50(a)(6) of the Code and Sec.  1.50-2.
    (c) Basis. With respect to any qualified property, the term basis 
means the the basis of the qualified property determined immediately 
before the qualified property is placed in service by the taxpayer and 
in accordance with the general rules of subtitle A of the Code 
(subtitle A) for determining the basis of property (see subtitle A, 
subchapter O, part II). Thus, the basis of qualified property would 
generally be its cost (see section 1012) unreduced by any adjustments 
to basis and would include all items properly included by the taxpayer 
in the depreciable basis of the property.
    (d) Beginning of construction. The term beginning of construction 
has the meaning provided in Sec.  1.48D-4.
    (e) Eligible taxpayer. The term eligible taxpayer means any 
taxpayer that--
    (1) Is not a foreign entity of concern; and
    (2) Has not made an applicable transaction during the taxable year.
    (f) Foreign entities--(1) Foreign entity. The term foreign entity 
has the same meaning as provided in 15 CFR 231.105.
    (2) Foreign entity of concern. The term foreign entity of concern 
has the same meaning as provided in 15 CFR 231.106.
    (3) Owned by, controlled by, or subject to the jurisdiction or 
direction of. The term owned by, controlled by, or subject to the 
jurisdiction or direction of has the same meaning as provided in 15 CFR 
231.112 for purposes of determining whether an entity is a foreign 
entity under paragraph (f)(1) of this section or a foreign entity of 
concern under paragraph (f)(2) of this section.
    (g) Placed in service. The term placed in service has the same 
meaning as provided in Sec.  1.46-3(d).
    (h) Qualified Investment--(1) In general. Except as provided in 
paragraphs (h)(2) and (3) of this section, the term qualified 
investment with respect to an advanced manufacturing facility means, 
for any taxable year, the basis of any qualified property that is part 
of an advanced manufacturing facility and placed in service by the 
taxpayer during the taxable year.
    (2) Special rules for certain passthrough entities. In the case of 
any qualified property that is part of an advanced manufacturing 
facility of an eligible taxpayer and placed in service by an entity 
described in paragraphs (h)(2)(i) through (iii) of this section during 
a taxable year, the rules of this paragraph (h)(2) apply to determine 
the qualified investment for the taxable year with respect to the 
advanced manufacturing facility.
    (i) Partnership. In the case of a partnership that places in 
service qualified property that is part of an advanced manufacturing 
facility of an eligible taxpayer, each partner in the partnership must 
take into account separately the partner's share of the basis of the 
qualified property placed in service by the partnership during the 
taxable year as provided in Sec.  1.46-3(f).
    (ii) S corporation. The basis of qualified property that is part of 
an advanced manufacturing facility of an eligible taxpayer and placed 
in service during the taxable year by an S corporation (as defined in 
section 1361(a) of the Code) must be apportioned pro rata among the S 
corporation's shareholders on the last day of the S corporation's 
taxable year as provided in section 1366.
    (iii) Estate or trust. The basis of qualified property that is part 
of an advanced manufacturing facility of an eligible taxpayer and 
placed in service during the taxable year by an estate or trust must be 
apportioned among the estate or trust and its beneficiaries on the 
basis of the income of the estate or trust allocable to each for that 
taxable year.
    (3) Qualified progress expenditures election. A taxpayer may elect, 
as provided in Sec.  1.46-5, to increase the qualified investment with 
respect to any advanced manufacturing facility of an eligible taxpayer 
for the taxable year, by any qualified progress expenditures made after 
August 9, 2022.
    (4) Examples. The provisions of this paragraph (h) are illustrated 
by the following examples.
    (i) Example 1: Advanced manufacturing investment credit--qualified 
investment in general. On November 1, 2023, X, a calendar-year C 
corporation, places in service qualified property with a basis of 
$200,000, and on December 1, 2023, X places in service qualified 
property with a basis of $300,000. X's qualified investment for the 
taxable year is $500,000 ($200,000 + $300,000).
    (ii) Example 2: Advanced manufacturing investment credit, qualified 
investment for partnerships. A, B, C, and D, all calendar-year C 
corporations, are partners in the ABCD partnership. Partners A, B, C, 
and D share partnership profits equally. On November 1, 2023, the ABCD 
partnership placed in service qualified property with a basis of $1 
million. Each partner's share of the basis of the qualified property, 
as determined in Sec.  1.46-3(f)(2), is $250,000 ($1m x 0.25) and each 
partner's qualified investment is $250,000.
    (i) Section 48D credit. The term section 48D credit means the 
advanced manufacturing investment credit determined under section 48D 
and the section 48D regulations.
    (j) Section 48D regulations. The term section 48D regulations means 
this section and Sec. Sec.  1.48D-2 through 1.48D-6 and 1.50-2.
    (k) Semiconductor means, consistent with 15 CFR 231.117, an 
integrated electronic device or system most commonly manufactured using

[[Page 17459]]

materials such as, but not limited to, silicon, silicon carbide, or 
III-V compounds, and processes such as, but not limited to, 
lithography, deposition, and etching. Such devices and systems include, 
but are not limited to, analog and digital electronics, power 
electronics, and photonics, for memory, processing, sensing, actuation, 
and communications applications.
    (l) Semiconductor manufacturing--(1) In general. The term 
semiconductor manufacturing and the term manufacturing of 
semiconductors are synonymous and mean, consistent with 15 CFR 231.118, 
semiconductor fabrication or semiconductor packaging. Semiconductor 
fabrication includes the process of forming devices like transistors, 
poly capacitors, non-metal resistors, and diodes, as well as 
interconnects between such devices, on a wafer of semiconductor 
material. Semiconductor packaging means the process of enclosing a 
semiconductor in a protective container (package) and providing 
external power and signal connectivity for the assembled integrated 
circuit.
    (2) Semiconductor manufacturing processes. The following 
definitions apply for purposes of section 48D and the section 48D 
regulations:
    (i) Packaging means the process of enclosing a semiconductor in a 
protective container (package) and providing external power and signal 
connectivity for the assembled integrated circuit.
    (ii) Advanced packaging means a subset of packaging technologies 
that uses novel techniques and materials to increase the performance, 
power, modularity, and/or durability of an integrated circuit. Advanced 
packaging technologies include flip-chip, 2D, 2.5D, and 3D stacking, 
fan-out and fan-in, and embedded die/system-in-package (SiP).
    (m) Semiconductor manufacturing equipment. The term semiconductor 
manufacturing equipment means the specialized equipment integral to the 
manufacturing of semiconductors and subsystems that enable or are 
incorporated into the manufacturing equipment. Specific examples of 
semiconductor manufacturing equipment and subsystems that enable 
semiconductor manufacturing equipment include:
    (1) Deposition equipment, including, Chemical Vapor Deposition 
(CVD), Physical Vapor Deposition (PVD), and Atomic Layer Deposition 
(ALD);
    (2) Etching equipment (wet etch, dry etch);
    (3) Lithography equipment (steppers, scanners, extreme ultraviolet 
(EUV));
    (4) Wafer slicing equipment, wafer dicing equipment, and wire 
bonders;
    (5) Inspection and measuring equipment, including scanning electron 
microscopes, atomic force microscopes, optical inspection systems, and 
wafer probes;
    (6) Certain metrology and inspection systems; and
    (7) Ion implantation and diffusion/oxidation furnaces.
    (n) Manufacturing semiconductor manufacturing equipment. The term 
manufacturing semiconductor manufacturing equipment means the physical 
production of semiconductor manufacturing equipment in a manufacturing 
facility.
    (o) Applicability date. This section applies to property that is 
placed in service after December 31, 2022, and during a taxable year 
ending on or after [DATE OF PUBLICATION OF FINAL RULE].


Sec.  1.48D-3  Qualified property.

    (a) In general. This section provides definitions and rules 
relating to qualified property for purposes of section 48D of the 
Internal Revenue Code and the section 48D regulations.
    (b) Qualified property. The term qualified property means tangible 
depreciable property that is integral to the operation of an advanced 
manufacturing facility and that is either--
    (1) Constructed, reconstructed, or erected by the taxpayer; or
    (2) Acquired by the taxpayer if the original use of such property 
commences with the taxpayer.
    (c) Tangible depreciable property--(1) In general. The term 
tangible depreciable property means tangible personal property (as 
defined in Sec.  1.48-1(c)), other tangible property (as defined in 
Sec.  1.48-1(d)), and building and structural components (as defined in 
Sec.  1.48-1(e), except as provided in paragraph (c)(2) of this 
section) with respect to which depreciation (or amortization in lieu of 
depreciation) is allowable. The law of a State or local jurisdiction is 
not controlling for purposes of determining whether property is 
tangible property for purposes of section 48D or the section 48D 
regulations.
    (2) Exception. Pursuant to section 48D(b)(2)(B)(ii), the term 
tangible depreciable property does not include a building and its 
structural components, or a portion thereof, used for:
    (i) Offices;
    (ii) Administrative services such as human resources or personnel 
services, payroll services, legal and accounting services, and 
procurement services;
    (iii) Sales or distribution functions;
    (iv) Security services (not including cybersecurity operations); or
    (v) Any other functions unrelated to manufacturing of 
semiconductors or semiconductor manufacturing equipment.
    (d) Constructed, reconstructed, or erected by the taxpayer. 
Property is considered constructed, reconstructed, or erected by the 
taxpayer if the work is done for the benefit of the taxpayer in 
accordance with the taxpayer's specifications.
    (e) Original use--(1) In general. Except as provided in paragraph 
(e)(2) of this section, the term original use means with respect to any 
property the first use to which the property is put by any taxpayer in 
connection with a trade or business or for the production of income. 
Additional capital expenditures paid or incurred by a taxpayer to 
recondition or rebuild property acquired or owned by the taxpayer 
satisfy the original use requirement to the extent of the amount of the 
expenditures paid or incurred by a taxpayer. However, a taxpayer's cost 
to acquire property reconditioned or rebuilt by another taxpayer does 
not satisfy the original use requirement. Whether property is 
reconditioned or rebuilt property will be determined based on the facts 
and circumstances.
    (2) Treatment of inventory. For purposes of paragraph (e)(1) of 
this section, if a taxpayer initially acquires new property and holds 
the property primarily for sale to customers in the ordinary course of 
the taxpayer's trade or business and subsequently withdraws the 
property from inventory and uses the property primarily in the 
taxpayer's trade or business or primarily for the taxpayer's production 
of income, the taxpayer is considered the original user of the 
property. If a person initially acquires new property and holds the 
property primarily for sale to customers in the ordinary course of the 
person's business and a taxpayer subsequently acquires the property 
from the person for use primarily in the taxpayer's trade or business 
or primarily for the taxpayer's production of income, the taxpayer is 
considered the original user of the property. For purposes of this 
paragraph (e), the original use of the property by the taxpayer 
commences on the date on which the taxpayer first uses the property 
primarily in the taxpayer's trade or business or primarily for the 
taxpayer's production of income.
    (f) Integral to the operation of an advanced manufacturing 
facility--(1) In general. To qualify for the section 48D credit, 
property must be integral to the operation of manufacturing

[[Page 17460]]

semiconductors or manufacturing semiconductor manufacturing equipment, 
both as provided in Sec.  1.48D-2. Property is integral to the 
operation of manufacturing semiconductors or semiconductor 
manufacturing equipment if such property is used directly in the 
manufacturing operation, is essential to the completeness of the 
manufacturing operation, and is not transformed in any material way as 
a result of the manufacturing operation. Materials, supplies, and other 
inventoriable items of property that are transformed into a finished 
semiconductor or into a finished unit of semiconductor manufacturing 
equipment are not considered property integral to the operation of 
manufacturing semiconductors or semiconductor manufacturing equipment. 
In addition, property such as pavements, parking areas, inherently 
permanent advertising displays, or inherently permanent outdoor 
lighting facilities, although used in the operation of a business, 
ordinarily are not integral to the operation of manufacturing 
semiconductors or semiconductor manufacturing equipment. Thus, for 
example, all property used by the taxpayer to acquire or transport 
materials or supplies to the point where the actual manufacturing 
activity commences (such as docks, railroad tracks, and bridges), or 
all property (other than materials or supplies) used by the taxpayer to 
manufacture semiconductors or to manufacture semiconductor 
manufacturing equipment within the meaning of Sec.  1.48D-2, would be 
considered property integral to the operation of an advanced 
manufacturing facility of an eligible taxpayer. Property is considered 
integral to the operation of an advanced manufacturing facility of an 
eligible taxpayer if so used either by the owner of the property or by 
the lessee of the property. Specific examples of property which 
normally would be integral to the operation of the advanced 
manufacturing facility of an eligible taxpayer are:
    (i) Deposition equipment used in the processes of Chemical Vapor 
Deposition (CVD), and Physical Vapor Deposition (PVD), Etching 
Equipment, lithography equipment, including Extreme Ultraviolet 
Lithography (EUV);
    (ii) Wet process tools, analytical tools, E-Beam operation tools, 
mask manufacturing equipment, chemical mechanical polishing equipment, 
reticle handlers, and stockers;
    (iii) Inspection and metrology equipment;
    (iv) Clean room facilities, including specialized lighting systems, 
automated material systems for wafer handling, locker and growing 
rooms, specialized recirculating air handlers, to maintain the 
cleanroom free from particles, control temperature and humidity levels, 
and specialized ceilings comprised of HEPA filters;
    (v) Electrical power facilities, cooling facilities, chemical 
supply systems, and wastewater systems;
    (vi) Sub-fab levels containing pumps, transformers, abatement 
systems, ultrapure water systems, uninterruptible power supply, and 
boilers, pipes, storage systems, wafer routing systems and databases, 
backup systems, quality assurance equipment, and computer data centers; 
and
    (vii) Utility level equipment including chillers, systems to handle 
nitrogen, argon, and other gases, compressor systems, and pipes.
    (2) Research or storage facilities. If property, including a 
building and its structural components, constitutes a research or 
storage facility and is used in connection with the manufacturing of 
semiconductors or semiconductor manufacturing equipment, the property 
may qualify as integral to the operation of the advanced manufacturing 
facility under section 48D(b)(2)(A)(iv). Specific examples of research 
facilities include research facilities that manufacture semiconductors 
in connection with research, such as pre-pilot production lines and 
prototypes, including semiconductor packaging. Specific examples of 
storage facilities are mineral, chemical, and gas storage tanks, 
including high pressure cylinders or specially designed tanks and 
drums. A research facility that does not manufacture any type of 
semiconductors, as provided in Sec.  1.48D-2(k), or semiconductor 
manufacturing equipment, as provided in Sec.  1.48D-2(m), does not 
qualify.
    (g) Applicability date. This section applies to property that is 
placed in service after December 31, 2022, and during a taxable year 
ending on or after [DATE OF PUBLICATION OF FINAL RULE].


Sec.  1.48D-4  Advanced manufacturing facility of an eligible taxpayer.

    (a) In general. This section provides definitions and rules 
relating to advanced manufacturing facilities of eligible taxpayers for 
purposes of section 48D of the Internal Revenue Code and the section 
48D regulations.
    (b) Advanced manufacturing facility. For purposes of section 
48D(b)(3) and this section, the term advanced manufacturing facility 
means a facility of an eligible taxpayer for which the primary purpose, 
as determined under paragraph (c)(1) of this section, is the 
manufacturing of finished semiconductors, as defined in Sec.  1.48D-
2(l), or the manufacturing of finished semiconductor manufacturing 
equipment, as defined in Sec.  1.48D-2(n).
    (c) Primary purpose--(1) In general. The determination of the 
primary purpose of a facility will be made based on all the facts and 
circumstances surrounding the construction, reconstruction, or erection 
of the advanced manufacturing facility of an eligible taxpayer. Facts 
that may indicate a facility has a primary purpose of manufacturing 
finished semiconductors or manufacturing finished semiconductor 
manufacturing equipment include designs or other documents for the 
facility that demonstrate that the facility is designed to make 
finished semiconductors or finished products consisting of specialized 
equipment that can only be used for semiconductor manufacturing; the 
possession of permits or licenses needed to manufacture finished 
semiconductors or finished semiconductor manufacturing equipment; and 
executed contracts to supply finished semiconductor manufacturing 
equipment to a finished semiconductor manufacturer in place either 
before or within 6 months after the facility is placed in service.
    (2) No primary purpose. A facility that manufactures, produces, 
grows, or extracts materials or chemicals that are supplied to an 
advanced manufacturing facility is not a facility for which the primary 
purpose is the manufacturing of semiconductors or semiconductor 
manufacturing equipment. Thus, for example, facilities that grow wafers 
or produce gases, or that manufacture components or parts, to supply an 
advanced manufacturing facility that manufactures semiconductors or 
semiconductor manufacturing equipment are not facilities for which the 
primary purpose is the manufacturing of semiconductors or the 
manufacturing of semiconductor manufacturing equipment.
    (3) Examples. The following examples illustrate the rules of this 
paragraph (c):
    (i) Example (i)--Primary purpose. In January 2023, X Corp, a 
calendar-year C corporation, begins construction of a facility that 
will manufacture equipment that is integral to the manufacturing 
operations of a manufacturer of semiconductors. A portion of the 
equipment, however, could be used for other manufacturing operations. X 
Corp enters into a contract with Y Corp, which is building a 
semiconductor manufacturing facility to be placed in service in July 
2024, to supply Y Corp

[[Page 17461]]

with the equipment it will need for its semiconductor manufacturing 
operations. Such equipment represents approximately 75 percent of the 
potential output of X Corp's facility (by cost to produce such 
equipment) of X Corp's facility for the first year of operations. X 
Corp will be considered as having a primary purpose of manufacturing 
semiconductor manufacturing equipment.
    (ii) Example (ii)--Primary purpose. In January 2023, Y Corp, a C 
corporation, with a calendar-year taxable year, begins construction of 
a facility that will manufacture scanning electron microscopes. Y Corp 
enters into a contract with Z Corp, which is building a semiconductor 
manufacturing facility to be placed in service in July 2024, to supply 
Z Corp with equipment it will use as an integral part of its 
semiconductor manufacturing operations. Such equipment represents 
approximately 75 percent of the potential output (by cost) of Y Corp's 
facility for the first year of operations. Y Corp will be considered as 
having a primary purpose of manufacturing semiconductor manufacturing 
equipment because scanning electron microscopes are specialized 
equipment integral to the manufacturing of semiconductors.
    (d) Applicability date. This section applies to property that is 
placed in service after December 31, 2022, and during a taxable year 
ending on or after [DATE OF PUBLICATION OF FINAL RULE].


Sec.  1.48D-5  Beginning of construction.

    (a) Termination of credit--(1) In general. The credit allowed under 
section 48D of the Internal Revenue Code (Code) and the section 48D 
regulations does not apply to property that is part of an advanced 
manufacturing facility of an eligible taxpayer if the beginning of 
construction of the property, as defined in paragraph (a)(2) of this 
section, begins after December 31, 2026 (the date specified in section 
48D(e)).
    (2) Property. For purposes of determining beginning of construction 
of property under this section, the unit of property is--
    (i) A single advanced manufacturing facility project as described 
in paragraph (a)(3) of this section; or
    (ii) An item of qualified property (as defined in Sec.  1.48D-
3(b)).
    (3) Single advanced manufacturing facility project. Solely for 
purposes of determining whether construction of a qualified property 
has begun for purposes of section 48D and the section 48D regulations, 
multiple items of qualified property or advanced manufacturing 
facilities that are operated as part of a single advanced manufacturing 
facility project (along with any items of property, such as clean 
rooms, chemical delivery systems, chemical storage facilities, 
temperature control systems, and robotic handling systems that are 
integral to the operation of the single advanced manufacturing facility 
project) will be treated as a single item of qualified property. 
Whether multiple qualified properties or advanced manufacturing 
facilities are operated as part of a single advanced manufacturing 
facility project will depend on all the relevant facts and 
circumstances.
    (i) Factors used for single advanced manufacturing facility project 
determination. Factors indicating that multiple qualified properties or 
advanced manufacturing facilities are operated as part of a single 
advanced manufacturing facility project may include:
    (A) The properties or facilities are owned by a single legal 
entity;
    (B) The properties or facilities are constructed on contiguous 
pieces of land;
    (C) The properties or facilities are described in a common supply 
contract or other type of relevant contract;
    (D) The properties or facilities share a common electricity and/or 
water supply;
    (E) The properties or facilities are described in one or more 
common environmental or other regulatory permits;
    (F) The properties or facilities were constructed pursuant to a 
single master construction contract; or
    (G) The construction of the properties or facilities was financed 
pursuant to the same loan agreement or other financing arrangement.
    (ii) Example. A taxpayer is developing Project C, a project that 
will consist of 3 advanced manufacturing facilities constructed on the 
same campus. Project C will share a common electricity supply, and 
semiconductors manufactured by Project C will be sold to Buyer through 
a single supply contract. In 2023, for 1 of the 3 advanced 
manufacturing facilities, the taxpayer installs deposition equipment. 
Thereafter, the taxpayer completes the construction of all 3 advanced 
manufacturing facilities pursuant to a continuous program of 
construction. For purposes of the section 48D credit, Project C is a 
single project that will be treated as a single property, and the 
taxpayer performed physical work of a significant nature that 
constitutes the beginning of construction of Project C in 2023.
    (iii) Timing of single advanced manufacturing facility project 
determination. Whether multiple properties or advanced manufacturing 
facilities are operated as part of a single advanced manufacturing 
facility project and are treated as a single item of property for 
purposes of the beginning of construction requirement of section 48D 
and the section 48D regulations is determined in the taxable year 
during which the last of the multiple properties or facilities is 
placed in service.
    (iv) Disaggregation. Multiple properties or advanced manufacturing 
facilities that are operated as part of a single advanced manufacturing 
facility project and treated as a single item of qualified property 
under paragraph (a)(3) of this section for purposes of determining 
whether construction of a qualified property or advanced manufacturing 
facility has begun may be disaggregated and treated as separate items 
of qualified property for purposes of determining whether a separate 
advanced manufacturing facility or item of qualified property satisfies 
the continuity safe harbor (as defined in paragraph (e) of this 
section). Those disaggregated separate advanced manufacturing 
facilities or items of qualified property that are placed in service 
prior to the continuity safe harbor deadline will be eligible for the 
continuity safe harbor. The remaining disaggregated separate items of 
property or facilities may satisfy the continuity requirement under a 
facts and circumstances determination.
    (v) Example. A taxpayer is developing Project D, a project that 
will consist of 4 separate properties. Project D will use the same 
water supply and each property within Project D will be constructed 
pursuant to a single master construction contract. Under the single 
project rule provided in paragraph (a)(3) of this section, Project D is 
a single project that will be treated as a single property. In 2024, 
for 3 of the 4 separate properties, the taxpayer installs property 
integral to the operation of the advanced manufacturing facility. 
Accordingly, the taxpayer has performed physical work of a significant 
nature that constitutes the beginning of construction of Project D for 
purposes of section 48D(e). Thereafter, on the last day of the 10-year 
continuity safe harbor period, the taxpayer places in service only 3 of 
the 4 separate properties within Project D. The taxpayer disaggregates 
Project D under paragraph (a)(3)(iv) of this section and accordingly, 
only 3 of the 4 separate properties satisfy the Continuity Safe Harbor. 
For

[[Page 17462]]

the remaining 1 separate property, the taxpayer may demonstrate that it 
satisfies the continuity requirement provided in paragraph (e) of this 
section based on the facts and circumstances, to enable the taxpayer to 
claim the section 48D credit.
    (b) Beginning of construction--(1) In general. For purposes of 
section 48D, the section 48D regulations, and section 107(f)(1) of the 
CHIPS Act of 2022, Public Law 117-167, div. A, 136 Stat. 1366, 1399 
(August 9, 2022), a taxpayer may establish that construction of an item 
of property (as defined in paragraph (a)(2) of this section) of the 
taxpayer begins under either:
    (i) The physical work test of paragraph (c) of this section; or
    (ii) The five percent safe harbor of paragraph (d) of this section.
    (2) Continuity requirement. See paragraph (e) of this section for 
the continuity requirement applicable for purposes of the physical work 
test and the five percent safe harbor, which must be demonstrated 
either by maintaining continuous construction (as defined in paragraph 
(e)(2) of this section) or continuous efforts (as defined in paragraph 
(e)(3) of this section).
    (c) Physical work test--(1) In general. Under the physical work 
test, construction of an item of property begins when physical work of 
a significant nature begins, provided that the taxpayer maintains 
continuous construction or continuous efforts. This test focuses on 
nature of the work performed, not the amount of the costs. Assuming the 
work performed is of a significant nature, there is no fixed minimum 
amount of work, monetary or percentage threshold required to satisfy 
the physical work test.
    (2) Physical work of significant nature--(i) In general. Work 
performed by the taxpayer and work performed for the taxpayer by other 
persons under a binding written contract that is entered into prior to 
the manufacture, construction, or production of the property for use by 
the taxpayer in the taxpayer's trade or business of manufacturing 
semiconductors or semiconductor manufacturing equipment is taken into 
account in determining whether physical work of a significant nature 
has begun. Both on-site and off-site work (performed either by the 
taxpayer or by another person under a binding written contract) may be 
taken into account for purposes of demonstrating that physical work of 
a significant nature has begun. A written contract is binding only if 
it is enforceable under local law against the taxpayer or a predecessor 
and does not limit damages to a specified amount (for example, by use 
of a liquidated damages provision). For this purpose, a contractual 
provision that limits damages to an amount equal to at least five 
percent of the total contract price will not be treated as limiting 
damages to a specified amount. For additional guidance regarding the 
definition of a binding written contract, see Sec.  1.168(k)-
1(b)(4)(ii)(A) through (D).
    (ii) Exceptions. Physical work of significant nature does not 
include preliminary activities, including but not limited to planning 
or designing, securing financing, exploring, researching, obtaining 
permits, licensing, conducting surveys, environmental and engineering 
studies, or clearing a site, even if the cost of those preliminary 
activities is properly included in the depreciable basis of the 
property. Physical work of a significant nature also does not include 
work (performed either by the taxpayer or by another person under a 
binding written contract) to produce property that is either in 
existing inventory or is normally held in inventory by a vendor.
    (d) Five percent safe harbor--(1) In general. Construction of a 
property will be considered as having begun if:
    (i) A taxpayer pays or incurs (within the meaning of Sec.  1.461-
1(a)(1) and (2)) five percent or more of the total cost of the 
property; and
    (ii) Thereafter, the taxpayer maintains continuous construction or 
continuous efforts.
    (2) Costs. All costs properly included in the basis of the property 
are taken into account to determine whether the five percent safe 
harbor has been met. For property that is manufactured, constructed, or 
produced for the taxpayer by another person under a binding written 
contract with the taxpayer, costs incurred with respect to the property 
by the other person before the property is provided to the taxpayer are 
deemed incurred by the taxpayer when the costs are incurred by the 
other person under the principles of section 461 of the Code.
    (3) Cost overruns--(i) Single advanced manufacturing facility 
project. If the total cost of a property that is a single advanced 
manufacturing facility project comprised of multiple properties (as 
described in paragraph (a)(3) of this section) exceeds its anticipated 
total cost such that the amount the taxpayer actually paid or incurred 
with respect to the single advanced manufacturing facility project to 
establish the beginning of its construction under paragraph (b)(1)(ii) 
of this section is less than five percent of the total cost at the time 
it is placed in service, the five percent safe harbor is not fully 
satisfied. However, the five percent safe harbor will be satisfied with 
respect to some, but not all, of the separate properties or facilities 
(as described in paragraph (a)(3) of this section) comprising the 
single advanced manufacturing facility project, as long as the total 
aggregate cost of those properties is not more than twenty times 
greater than the amount the taxpayer paid or incurred.
    (ii) Example. In 2023, taxpayer incurs $300,000 in costs to 
construct Project A, comprised of six advanced manufacturing facilities 
that will be operated as a single project. Taxpayer anticipates that 
each advanced manufacturing facility will cost $1,000,000 for a total 
cost for Project A of $6,000,000. Thereafter, the taxpayer makes 
continuous efforts to advance towards completion of Project A. The 
taxpayer timely places Project A in service in 2025. In 2025, the 
actual total cost of Project A amounts to $7,500,000, with each 
advanced manufacturing facility costing $1,250,000. Although the 
taxpayer did not pay or incur five percent of the actual total cost of 
Project A in 2023, the taxpayer will be treated as satisfying the Five 
Percent Safe Harbor in 2023 with respect to four of the advanced 
manufacturing facilities, as their actual total cost of $5,000,000 is 
not more than twenty times greater than the $300,000 in costs incurred 
by the taxpayer. The taxpayer will not be treated as satisfying the 
five percent safe harbor in 2023 with respect to two of the properties. 
Thus, the taxpayer may claim the section 48D credit based on $5,000,000 
the cost of four of the properties.
    (iii) Single property. If the total cost of a single property, 
which is not part of a single advanced manufacturing facility project 
comprised of multiple properties or facilities (as described in 
paragraph (a)(3) of this section) and cannot be separated into multiple 
properties or facilities, exceeds its anticipated total cost so that 
the amount a taxpayer actually paid or incurred with respect to the 
single property as of an earlier year is less than five percent of the 
total cost of the single property at the time it is placed in service, 
then the taxpayer will not satisfy the five percent safe harbor with 
respect to any portion of the single property in such earlier year.
    (A) Example. In 2023, a taxpayer incurs $250,000 in costs to 
construct Project B, a single property. The taxpayer anticipates that 
the total cost of Project B will be $5,000,000. Thereafter, the 
taxpayer makes continuous efforts to advance towards completion of 
Project B. The taxpayer places Project B in service in a later year. At 
that time, its actual total cost amounts to $6,000,000.

[[Page 17463]]

Because Project B is a single property that is not a single project 
comprised of multiple properties, the taxpayer will not satisfy the 
five percent safe harbor as of 2023. However, if the construction of 
Project B satisfies the requirements of the physical work test by also 
beginning physical work of a significant nature in 2024, the taxpayer 
may be able to demonstrate that construction began in 2024.
    (B) [Reserved]
    (e) Continuity requirement--(1) In general. For purposes of the 
physical work test and five percent safe harbor, taxpayers must satisfy 
the continuity requirement by demonstrating either continuous 
construction or continuous efforts regardless of whether the physical 
work test or the five percent safe harbor was used to establish the 
beginning of construction. Whether a taxpayer meets the continuity 
requirement under either test is determined by the relevant facts and 
circumstances. The Commissioner will closely scrutinize a property and 
may determine that the beginning of construction is not satisfied with 
respect to a property if a taxpayer does not meet the continuity 
requirement.
    (2) Continuous construction. The term continuous construction means 
a continuous program of construction that involves continuing physical 
work of a significant nature. Whether a taxpayer maintains a continuous 
program of construction to satisfy the continuity requirement will be 
determined based on all the relevant facts and circumstances.
    (3) Continuous efforts. The term continuous efforts means 
continuous efforts to advance towards completion of a property to 
satisfy the continuity requirement. Whether a taxpayer makes continuous 
efforts to advance towards completion of a property will be determined 
by the relevant facts and circumstances. Facts and circumstances 
indicating continuous efforts to advance towards completion of a 
property may include:
    (i) Paying or incurring additional amounts included in the total 
cost of the property;
    (ii) Entering into binding written contracts for the manufacture, 
construction, or production of the property or for future work to 
construct the property;
    (iii) Obtaining necessary permits; and
    (iv) Performing physical work of a significant nature.
    (4) Excusable disruptions to continuous construction and continuous 
efforts tests--(i) In general. Certain disruptions in a taxpayer's 
continuous construction or continuous efforts to advance towards 
completion of a property that are beyond the taxpayer's control will 
not be considered as indicating that a taxpayer has failed to satisfy 
the continuity requirement.
    (ii) Effect of excusable disruptions on continuity safe harbor. The 
excusable disruptions provided in this paragraph (e)(4) will not extend 
the continuity safe harbor deadline that is provided in paragraph 
(e)(6) of this section.
    (iii) Non-exclusive list of construction disruptions. The following 
is a non-exclusive list of construction disruptions that will not be 
considered as indicating that a taxpayer has failed to satisfy the 
continuity requirement:
    (A) Delays due to severe weather conditions;
    (B) Delays due to natural disasters;
    (C) Delays in obtaining permits or licenses from Federal, Indian 
Tribal, State, territorial, or local governments, including--
    (1) Delays in obtaining air emissions, water discharge, or 
hazardous waste management permits or chemical handling licenses from 
the Environmental Protection Agency (EPA) or another environmental 
protection authority;
    (2) Delays as a result of the review process under State, local, or 
Federal environmental laws, for example, a review under the National 
Environmental Policy Act; and
    (3) Delays in obtaining construction permits;
    (D) Delays at the written request of a Federal, State, local, or 
Indian Tribal government regarding matters of public health, public 
safety, security, or similar concerns, including hazardous chemical 
transport;
    (E) Delays related to electrical or water supply, such as those 
relating to the completion of construction on a distribution line or 
water supply line that may be associated with a project's electrical 
and water needs, whether constructed by the eligible taxpayer that is 
the owner of the advanced manufacturing facility, a governmental 
entity, or another person;
    (F) Delays in the manufacture of custom components or equipment;
    (G) Delays due to the inability to obtain specialized equipment of 
limited availability;
    (H) Delays due to supply shortages;
    (I) Delays due to the presence of endangered species;
    (J) Financing delays; and
    (K) Delays due to specialized labor shortages or labor stoppages.
    (5) Timing of excusable disruption determination. In the case of a 
single advanced manufacturing facility project comprised of a single 
property, whether an excusable disruption has occurred for purposes of 
the beginning of construction requirement of section 48D and the 
section 48D regulations must be determined in the taxable year during 
which the property is placed in service. In the case of a single 
advanced manufacturing facility project comprised of multiple 
properties or facilities, whether an excusable disruption has occurred 
for purposes of the beginning of construction requirement of section 
48D and the section 48D regulations must be determined in the taxable 
year during which the last of multiple properties or facilities is 
placed in service.
    (6) Continuity safe harbor--(i) In general. A taxpayer will be 
deemed to satisfy the continuity requirement provided the property is 
placed in service no more than 10 calendar years after the calendar 
year during which construction of the property began for purposes of 
section 48D and the section 48D regulations.
    (ii) Example. If construction begins on a property on January 15, 
2023, and the property is placed in service by December 31, 2033, the 
property will be considered to satisfy the Continuity Safe Harbor. If 
the property is not placed in service before January 1, 2034, whether 
the continuity requirement was satisfied will be determined based on 
all the relevant facts and circumstances.
    (f) Applicability date. This section applies to property that is 
placed in service after December 31, 2022, and during a taxable year 
ending on or after [DATE OF PUBLICATION OF FINAL RULE].


Sec.  1.48D-6  Elective payment election.

    (a) Elective payment election--(1) In general. Except as provided 
in paragraph (b) of this section, a taxpayer may elect under section 
48D(d)(1) of the Internal Revenue Code (Code) and this section with 
respect to the section 48D credit to be treated as making a payment 
against the tax imposed by subtitle A of the Code (for the taxable year 
with respect to which such credit was determined) equal to the amount 
of the credit with respect to any property otherwise allowable to the 
taxpayer (determined without regard to section 38(c) of the Code).
    (2) Timing of election. Any election under section 48D(d)(1) and 
this section must be made not later than the due date (including 
extensions of time) for the return of tax imposed by subtitle A of the 
Code for the taxable year for which the election is made, but in no 
event earlier than May 8, 2023.
    (3) Irrevocable. Any election under section 48D(d)(1) and this 
section, once

[[Page 17464]]

made, will be irrevocable and, except as otherwise provided, will apply 
with respect to any amount of section 48D credit for the taxable year 
for which the election is made.
    (4) Denial of double benefit. In the case of a taxpayer making an 
election under section 48D(d) and this section with respect to any 
section 48D credit determined under section 48D(a) and Sec.  1.48D-1, 
such credit will be reduced to zero and will, for any other purposes 
under the Code, be deemed to have been allowed to the taxpayer for such 
taxable year.
    (5) Treatment of payment. The payment described in section 
48D(d)(1) and paragraph (a)(1) of this section will be treated as made 
on the later of the due date (determined without regard to extensions) 
of the return of tax imposed by subtitle A of the Code for the taxable 
year or the date on which such return is filed.
    (b) Special rules for partnerships and S corporations--(1) In 
general. If a partnership or S corporation directly holds any property 
for which an advanced manufacturing investment credit is determined, 
any election under paragraph (a) must be made by the partnership or S 
corporation. No election under 48D(d) and this section by any partner 
or shareholder is allowed.
    (2) [Reserved]
    (c) Registration required--(1) In general. As a condition of, and 
prior to, any amount being treated as a payment that is made by the 
taxpayer under section 48D(d)(1) or any payment made pursuant to 
section 48D(d)(2)(A)(i)(I), the eligible taxpayer or partnership or S 
corporation must timely comply with the registration procedures set 
forth in this paragraph (c).
    (2) [Reserved]
    (d) Excessive payment--(1) In general. Except as provided in 
paragraph (d)(2) of this section, in the case of any amount treated as 
a payment which is made by the taxpayer under section 48D(d)(1) and 
paragraph (a) of this section, or any payment made pursuant to section 
48D(d)(2)(A)(i)(II) and paragraph (b) of this section, with respect to 
any property, which amount the Commissioner determines constitutes an 
excessive payment as defined in paragraph (d)(3) of this section, the 
tax imposed on such taxpayer by chapter 1 of the Code for the taxable 
year in which such determination is made is increased by an amount 
equal to the sum of--
    (i) The amount of such excessive payment; plus
    (ii) An amount equal to 20 percent of such excessive payment.
    (2) Reasonable cause. Paragraph (d)(1) of this section will not 
apply if the taxpayer demonstrates to the satisfaction of the 
Commissioner that the excessive payment resulted from reasonable cause.
    (3) Excessive payment defined. For purposes of section 48D(d) and 
this paragraph (d), the term excessive payment means, with respect to 
any property for which an election is made under section 48D(d) and 
this section for any taxable year, an amount equal to the excess of--
    (i) The amount treated as a payment which is made by the taxpayer 
pursuant to section 48D(d)(1) and paragraph (a) of this section, or any 
payment made by the Commissioner pursuant to section 48D(d)(2)(A)(I)(i) 
and paragraph (b) of this section, with respect to such property for 
such taxable year; over
    (ii) The amount of the section 48D credit which, without 
application of section 48D(d) and this section, would be otherwise 
allowable (determined without regard to section 38(c)) under section 
48D(a) and the section 48D regulations with respect to such property 
for such taxable year.
    (4) [Reserved]
    (e) Basis reduction and recapture--(1) In general. The rules in 
sections 50(a) and (c) of the Code apply with respect to elective 
payments under paragraphs (a) and (b) of this section.
    (2) [Reserved]
    (f) Mirror code territories. In the case of any possessions of the 
United States (U.S. territory) with a mirror code tax system (as 
defined in section 24(k) of the Code), section 48D(d) and this section 
are not treated as part of the income tax laws of the United States for 
purposes of determining the income tax law of such U.S. territory 
unless such territory elects to have section 48D(d) and this section so 
treated. Taxpayers must consult the applicable territory tax authority 
on whether such an election was made for the particular U.S. territory.
    (g) Applicability date. This section applies to property that is 
placed in service after December 31, 2022, and during a taxable year 
ending on or after [DATE OF PUBLICATION OF FINAL RULE].
0
Par. 3. Section 1.50-2 is added to read as follows:


Sec.  1.50-2  Recapture of the advanced manufacturing investment credit 
in the case of certain expansions.

    (a) Recapture in connection with certain expansions--(1) In 
general. Except as provided in section 50(a)(3)(B) of the Internal 
Revenue Code (Code) and paragraph (a)(2) of this section, if an 
applicable taxpayer engages in an applicable transaction before the 
close of the applicable period, then the tax under chapter 1 of the 
Code for the taxable year in which such transaction occurs is increased 
by 100 percent of the applicable transaction recapture amount. Any 
applicable taxpayer that engages in an applicable transaction during a 
taxable year does not meet the definition of an eligible taxpayer under 
section 48D(c) and the section 48D regulations and is ineligible for 
the section 48D credit for that taxable year. See paragraph (b) of this 
section for definitions of terms used in section 50(a)(3) and this 
section.
    (2) Exception. Section 50(a)(3)(A) and paragraph (a)(1) of this 
section do not apply if the applicable taxpayer demonstrates to the 
satisfaction of the Commissioner that the applicable transaction has 
been ceased or abandoned within 45 days of a determination and notice 
by the Commissioner. A taxpayer that ceases or abandons an applicable 
transaction for a taxable year may still be treated as engaging in a 
separate applicable transaction for a taxable year. However, a taxpayer 
may not circumvent the application of section 50(a)(3) and this section 
by engaging in a series of applicable transactions, multiple applicable 
transactions, or other similar arrangements.
    (3) Carrybacks and carryover adjusted. In the case of any cessation 
described in section 50(a)(1) or (2), or any applicable transaction to 
which section 50(a)(3) and paragraph (a)(1) of this section apply, any 
carryback or carryover under section 39 is appropriately adjusted by 
reason of such cessation or applicable transaction.
    (b) Definitions. The following definitions apply for purposes of 
section 50(a)(3) and this section.
    (1) Applicable period. The term applicable period means the 10-year 
period beginning on the date that an applicable taxpayer placed in 
service property that is eligible for the section 48D credit.
    (2) Applicable taxpayer--(i) In general. The term applicable 
taxpayer means--
    (A) Any taxpayer who was allowed a section 48D credit or made an 
election under section 48D(d)(1) and Sec.  1.48D-6(a) with respect to 
such credit, for any taxable year prior to the taxable year in which 
such taxpayer entered into an applicable transaction;
    (B) Any partnership or S corporation that made an election under 
section 48D(d)(2) and Sec.  1.48D-6(b) with respect to a credit 
determined under section 48D(a)(1) for any taxable year prior to

[[Page 17465]]

the taxable year in which such partnership or S corporation entered 
into an applicable transaction; and
    (C) Any partner in a partnership (directly or indirectly through 
one or more tiered partnerships) or shareholder in an S corporation for 
which the partnership or S corporation made an election under section 
48D(d)(2) and Sec.  1.48D-6(b) with respect to a credit determined 
under section 48D(a) for any taxable year prior to when such partner or 
shareholder entered into an applicable transaction.
    (ii) Affiliated groups. For purposes of this paragraph (b)(2), all 
members of an affiliated group under section 1504(a) of the Code, 
determined without regard to section 1504(b)(3) of the Code, are 
treated as one taxpayer.
    (3) Applicable transaction. Except as provided in section 
50(a)(6)(D)(ii) and paragraph (c)(1) of this section, the term 
applicable transaction means, with respect to any applicable taxpayer, 
any significant transaction involving the material expansion of 
semiconductor manufacturing capacity of such applicable taxpayer in any 
foreign country of concern.
    (4) Applicable transaction recapture amount--(i) In general. The 
term applicable transaction recapture amount means, with respect to an 
applicable taxpayer, the aggregate decrease in the credits allowed 
under section 38 of the Code for all prior taxable years that would 
have resulted solely from reducing to zero any credit determined under 
section 46 of the Code that is attributable to the advanced 
manufacturing investment credit under section 48D(a), with respect to 
property that has been placed in service during the applicable period.
    (ii) [Reserved]
    (5) Existing facility. The term existing facility, consistent with 
15 CFR 231.103, means any facility built, equipped, and operating at 
the semiconductor manufacturing capacity level for which it was 
designed prior to being placed in service by the taxpayer. Existing 
facilities are defined by their semiconductor manufacturing capacity at 
the time the qualified property is placed in service; facilities that 
undergo significant renovations after being placed in service will no 
longer qualify as existing facilities within the meaning of this 
paragraph (b)(5).
    (6) Foreign country of concern. The term foreign country of concern 
has the same meaning as provided in 15 CFR 231.104.
    (7) Material expansion. The term material expansion means, 
consistent with 15 CFR 231.111, the addition of physical space or 
equipment that has the purpose or effect of increasing semiconductor 
manufacturing capacity of a facility by more than 5 percent; or a 
series of such expansions which, in the aggregate at any time during 
the applicable period, increasing the semiconductor manufacturing 
capacity of a facility by more than 5 percent.
    (8) Semiconductor manufacturing capacity. The term semiconductor 
manufacturing capacity means, consistent with 15 CFR 231.119, the 
productive capacity of a semiconductor facility. In the case of a 
semiconductor fabrication facility, semiconductor manufacturing 
capacity is measured in wafer starts per month. In the case of a 
packaging facility, semiconductor manufacturing capacity is measured in 
packages per month.
    (9) Significant renovations. The term significant renovations 
means, consistent with 15 CFR 231.122, any set of changes to a facility 
that, in the aggregate during the applicable period, increase 
semiconductor manufacturing capacity by adding an additional line, or 
otherwise increasing semiconductor manufacturing capacity by 10 percent 
or more.
    (10) Significant transaction. As determined in coordination with 
the Secretary of Commerce and the Secretary of Defense, the term 
significant transaction means--
    (i) Any investment, whether proposed, pending, or completed, that 
is valued at $100,000 or more, including:
    (A) A merger, acquisition, or takeover, including:
    (1) The acquisition of an ownership interest in an entity;
    (2) A consolidation;
    (3) The formation of a joint venture; or
    (4) A long-term lease or concession arrangement under which a 
lessee (or equivalent) makes substantially all business decisions 
concerning the operation of a leased entity (or equivalent), as if it 
were the owner; or
    (B) Any other investment, including any capital expenditures or the 
formation of a subsidiary;
    (ii) A series of transactions described in paragraph (b)(10)(i) of 
this section, which, in the aggregate at any time during, the 
applicable period, are valued at $100,000 or more;
    (iii) A transaction that involves the expansion of manufacturing 
capacity for legacy semiconductors (other than with respect to an 
existing facility or equipment of an applicable taxpayer for 
manufacturing legacy semiconductors) if less than 85 percent of the 
output of the semiconductor manufacturing facility (for example, 
wafers, semiconductor devices, or packages) by value, is incorporated 
into final products (that is, not an intermediate product that is used 
as a factory inputs for producing other goods) that are used or 
consumed in the market of a foreign country of concern;
    (iv) A transaction during the applicable period in which an 
applicable taxpayer knowingly (within the meaning of 15 CFR 231.109) 
engages in any joint research, as defined in 15 CFR 231.108, or 
technology licensing effort with a foreign entity of concern that 
relates to a technology or product that raises national security 
concerns; or
    (v) Any of the transactions described in paragraphs (b)(10)(i) 
through (iv) of this section engaged in by any entity described in this 
paragraph (b)(10)(v) (consistent with the definition of affiliate in 15 
CFR 231.101):
    (A) Any entity if an applicable taxpayer directly or indirectly 
owns at least 50 percent of the outstanding voting interests in such 
entity.
    (B) Any entity if such entity directly or indirectly owns at least 
50 percent of the outstanding voting interests in an applicable 
taxpayer.
    (C) Any entity if one or more entities described in paragraph 
(b)(10)(v)(B) of this section directly or indirectly owns at least 50 
percent of the outstanding voting interests.
    (11) Technology licensing. The term technology licensing has the 
same meaning as provided in 15 CFR 231.123.
    (12) Technology or product that raises national security concerns. 
The term technology or product that raises national security concerns 
means, consistent with 15 CFR 231.124, any semiconductors critical to 
national security, as defined in 15 CFR 231.120, or any technology or 
product listed in Category 3 of the Commerce Control List (supplement 
No. 1 to part 774 of the Export Administration Regulations, 15 CFR part 
774) that is controlled for National Security (``NS'') reasons, as 
described in 15 CFR 742.4, or Regional Stability (``RS'') reasons, as 
described in 15 CFR 742.6.
    (c) Exception from the definition of applicable transaction for the 
manufacturing of legacy semiconductors--(1) In general. The term 
applicable transaction, as defined in section 50(a)(6)(D) and paragraph 
(b)(3) of this section, does not include a transaction that primarily 
involves the expansion of manufacturing capacity for legacy 
semiconductors, but only to the extent not described in paragraph 
(b)(10)(iii) of this section.
    (2) Legacy semiconductor. The term legacy semiconductor means, 
consistent with 15 CFR 231.110--

[[Page 17466]]

    (i) A digital or analog logic semiconductor that is of the 28 
nanometer generation or older (that is, has a gate length of 28 
nanometers or more for a planar transistor);
    (ii) A memory semiconductor with a half-pitch greater than 18 
nanometers for Dynamic Random Access Memory (DRAM) or less than 128 
layers for Not AND (NAND) Flash that does not utilize emerging memory 
technologies, such as transition metal oxides, phase-change memory, 
perovskites, ferromagnetics relevant to advanced memory fabrication; or
    (iii) A semiconductor identified by the Secretary of Commerce in a 
public notice issued under 15 U.S.C. 4652(a)(6)(A)(ii).
    (3) Exception from the definition of legacy semiconductor. 
Notwithstanding paragraph (c)(2) of this section, the following are not 
legacy semiconductors:
    (i) Semiconductors critical to national security, as defined in 15 
CFR 231.120; or
    (ii) A semiconductor with a post-planar transistor architecture 
(such as fin-shaped field field-effect transistor (FinFET) or gate all 
around field-effect transistor); and
    (iii) For the purposes of packaging facilities, semiconductors 
packaged utilizing three-dimensional (3D) integration.
    (d) Example. The provisions of this section are illustrated by the 
following example.
    (1) Example: Applicable transaction credit claimed. On October 15, 
2024, X Corp, a C corporation that is a calendar-year taxpayer, placed 
in service Property A, qualified property with a basis of $1 million. X 
Corp's qualified investment, as determined in Sec.  1.46-3(c), for the 
taxable year is $1 million. X Corp's advanced manufacturing investment 
credit for the taxable year is $250,000 ($1 million x 0.25) and, assume 
that X Corp's income tax liability is $400,000. X Corp does not 
determine any other credits in 2024. X claims an advanced manufacturing 
investment credit of $250,000 for its 2024 taxable year. On January 15, 
2026, X Corp engages in an applicable transaction, as defined in 
section 50(a)(6)(D) and paragraph (b)(3) of this section and did not 
cease or abandon the transaction within 45 days of a determination and 
notice by the Commissioner. X Corp has not determined or claimed any 
general business credits since its 2024 taxable year. The aggregate 
decrease in credits allowed under section 38 for all prior years 
resulting from reducing to zero any credit determined under section 46 
that is attributable to the advanced manufacturing investment credit is 
$250,000 ($250,000 (credit allowed)-$0 (credit that would have been 
allowed). X Corp's tax under chapter 1 is increased by $250,000 (1.0 x 
$250,000). Pursuant to section 48D(c), for the 2026 taxable year, X 
Corp is not an eligible taxpayer and is ineligible to claim or 
carryforward the advanced manufacturing investment credit.
    (2) [Reserved]
    (f) Applicability date. This section applies to property that is 
placed in service after December 31, 2022, and during a taxable year 
ending on or after [DATE OF PUBLICATION OF FINAL RULE].

Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2023-05871 Filed 3-21-23; 11:15 am]
BILLING CODE 4830-01-P